Treating Keating

When little old ladies start blaming U.S. senators for the loss of their life savings, something is obviously amiss. The senators, of course, deny such allegations, the plunder of senior citizens' bank accounts being one of those activities with which politicians prefer not to be publicly associated. But whether or not we believe the charges, we have to question a system under which they can credibly be raised.

How, indeed, could five senators find themselves accused of contributing to the shady investment practices and eventual collapse of a savings and loan association, a mess that will cost taxpayers some $2.3 billion? The answer is of considerable interest, since the Lincoln Savings & Loan rescue, the most expensive thrift bailout on record, is but one item in an S&L bill that may total as much as $300 billion.

In broad outline, the involvement of Sens. Alan Cranston (D–Cal.), Dennis DeConcini (D–Ariz.), John McCain (R–Ariz.), Donald Riegle (D–Mich.), and John Glenn (D–Ohio) consisted of attending two April 1987 meetings in which they pressured federal regulators to ease up on Lincoln. Their influence allegedly delayed the takeover of the California thrift—which finally occurred two years later. The delay raised the cost of the bailout by allowing Lincoln's managers to continue squandering deposits on risky investments. In addition to a concern that the thrift was being treated unfairly, the senators shared a common benefactor: Lincoln owner Charles H. Keating, who, together with his associates, had given them nearly $1.4 million in direct and indirect contributions.

Predictably, the Keating affair has elicited calls for changes in campaign financing, but this is a peripheral issue. The Los Angeles Times came closer to the basic problem when it asked: "How far can a senator go in exerting influence on behalf of a specific contributor or political ally?" As an ethical question, this is not very helpful. But as a practical question, it goes to the heart of the matter. How far a senator can go depends on how much power he or she has to benefit people—how much influence there is to peddle.

In the case at hand, the senators were in a position to help Keating only because the federal government has taken upon itself the responsibility of insuring S&L deposits and, therefore, of closely regulating S&Ls. Questions of fraud aside, the failure of Lincoln is a public issue—and a drain on the public coffers—only because of federal deposit insurance. The ultimate irony is that government intervention actually contributed to the failure of Lincoln and a host of other S&Ls by undermining market discipline and obstructing the flow of financial information.

Corruption inevitably accompanies the inappropriate exercise of state power. The government's involvement with S&Ls created the authority that Keating sought to counteract by appealing to the senators. If other public officials hadn't had the power to close down his S&L, the senators would have been of no use to him.

Keating understands how the system works. "One question…has to do with whether my financial support in any way influenced several political figures to take up my cause," he said last April, following the Lincoln takeover. "I want to say in the most forceful way I can: I certainly hope so."

No, no, no, no, no, the senators say. Keating has the wrong attitude. What we did was simply a matter of constituent service.

In other words, there was nothing wrong with summoning federal regulators to question their investigation of Lincoln and nothing improper about pressing Keating's case with Edwin J. Gray, then chairman of the Federal Home Loan Bank Board. The senators would have given the same attention to a senior citizen who had missed a Social Security check.

Plausibility aside, the senators' defenses are curious. Riegle, who suggested the meeting with Gray, claims that he and his colleagues had no impact on the Lincoln investigation. This does not say much for the effectiveness of the senators' constituent service. In any case, we can take little solace from the knowledge that they only tried to influence the probe.

Cranston, who received the lion's share of Keating's contributions, stresses that the thrift owner never asked for a "quid pro quo." That is, he never said, "You realize, Al, that I am giving you this money with the understanding that you will intervene improperly on my behalf with federal regulators." What a relief!

Clearly, we cannot depend on the moral reasoning of our senators to control their use of arbitrary power. Rather, we must give them as little power as possible. You can't sell what you don't have.